Economy: Weak growth in the wind

This assumes, though, that the Democrats and Republicans come to a short-term agreement, at the very least, that avoids another U.S. federal government shutdown and raises the debt ceiling.

The economists’ average forecast for U.S. GDP growth is 2.7% this year and 3.1% in 2015, while they expect Canada’s GDP growth to be only 2.3% in 2014 on average and 2.5% next year.

The acceleration in U.S. growth from 1.7% in 2013, combined with modest growth in the eurozone, is expected to produce global growth of about 3.5% this year from 3% in 2013, the economists predict, which should be enough to keep most resources prices at around their current, generally profitable levels.

Thus, growth in provinces such as British Columbia, Alberta, Saskatchewan and Newfoundland and Labrador is likely to outperform the national average. The high Canadian dollar continues to be a challenge for Ontario’s and Quebec’s manufacturers; as well, both those provinces have high deficits or debt that precludes major government stimulus.

Here’s a look at some of the factors that could affect this outlook:

– canadian housing. Demand has been stronger than expected during the past few years despite tighter mortgage regulations and increases in mortgage interest rates this year.

But Doug Porter, chief economist and director, economic research, with Bank of Montreal in Toronto, points out: “Consumers can afford to carry a lot of debt, given current low interest rates.”

The economists also theorize that consumers had pushed forward purchases to the past year because they wanted to buy before interest rates rise further.

There isn’t any evidence of a housing price bubble outside of the big-city condo markets – and that may be fuelled by foreign money, says Lloyd Atkinson, an independent financial and economic consultant in Toronto. He warns that these purchases may slow as investors from overseas become more comfortable with prospects in the U.S. and Europe.

– resources prices. Most of the economists expect oil to average US$95-US$100 a barrel and base metal prices to hold steady over the next few years. But Atkinson believes both resources’ prices will trend downward, with oil averaging just US$85 a barrel next year.

Emerging markets are key. Most of the economists assume China’s GDP will grow by 7%-7.5%. However, Atkinson points out that there are indications of large municipal debt, problems in China’s “shadow” banking system, difficulty in keeping inflation under control and the likelihood of social unrest if economic growth falters. He also is worried about India, whose growth he thinks will be much slower than expected in the absence of much needed economic reform.

A wild card is the agreement to lift sanctions on Iran if that country constrains its nuclear program. That could unleash large supplies of oil on the global market, warns Krishen Rangasamy, senior economist with National Bank of Canada in Montreal.

– business confidence. The economists think U.S. political gridlock sapped business confidence, both in the U.S. and globally, and discouraged new capital investment. That could happen again this year.

– financial markets confidence. Carlos Leitao, chief economist and strategist at Laurentian Bank of Canada in Montreal, thinks that the credit crisis may have reduced inflationary pressures in industrialized economies. If he’s right, then interest rates won’t have to rise as quickly or by as much as historically when healthy, sustainable economic growth returns. If markets don’t understand this, they could panic when rates don’t rise by as much as they expect, potentially creating another credit crisis. In Leitao’s view, educating markets about this is the central bank’s greatest challenge.

Avery Shenfield, chief economist with CIBC World Markets Inc. in Toronto, agrees that it will take a lower unemployment rate than in the past to generate inflationary pressure.

Financial markets already have proved that they are quick on the trigger, with the 100 basis point-plus increase in long rates after the U.S. Federal Reserve Board’s announcement last May that it was considering tapering its monetary stimulus program.

– exports. About 70% of Canadian exports go to the U.S., so an economic pickup there should mean more sales for Canadian firms. However, Craig Alexander, senior vice president and chief economist at Toronto-Dominion Bank in Toronto, warns that a lot of manufacturing capacity in Canada has been turned off and may not be turned back on quickly – or even be available. He notes that much auto production has shifted to the U.S. south and Mexico.

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